Should our deep tech startup raise another round or explore M&A?

5 Considerations - when to raise another VC round, when to consider an exit

As deep tech bankers, we hear this question frequently, since most of our clients are VC-funded. Should we raise a next round of growth capital, such as a larger Series B or C, or is now the time to consider an exit? Here are some quick tips on navigating these important decisions:

When to lean towards raising a larger Series B/C round:

1. The company grow faster by bringing in new investors and strategic partners to both the cap table and boardroom. New strategic investors can bring more than just capital to the relationship, by helping the company pivot to new markets, close bigger deals and bring new product feature requirements. The best strategic investors bring value because they have skin in the game (investment) and they are experts in the markets you are seeking to exploit the most. The other great thing about strategic investors is that they often make great buyers down the road. Additionally, a VC that is a good fit for your company also brings many of these strategic benefits and industry relationships. Bringing in a key strategic investor and a VC with a strong presence in your industry can jump-start your next phase of growth.
2. Management, key employees and investors are in it for the long term. They are ready to double-down on growth, and there is no immediate need from earlier investors or key employees for liquidity.
3. If new money comes at a reasonable price and terms. If you can get a good bang for the buck with equity investment, meaning valuations are strong (less dilution) and liquidation preferences are reasonable, you are less likely to get squeezed later on. This one is hard to know until you get competing term sheets to compare, but your current VCs or a good banker can help you estimate the market conditions beforehand, so you know what to expect.
4. The company and its target market have demonstrated enormous growth potential, but the customer traction and revenue aren’t quite there yet. If investors believe the market potential is there, your company has a truly unique offering, and they believe in the team, but the revenue isn't there yet, you may be more successful raising capital than exiting today.
5. The company needs more time to build bigger and better strategic relationships not just with customers, but also key strategic partners (who might later become good acquisition partners later). The deeper the relationship is with customers and partners, the better the exit will be later.

When to explore M&A

1. The company would scale better as part of a larger organization. That could be leveraging their professional sales force, marketing organization or technology platform pull-through. Eventually most companies will reach the asymptote of growth that they can achieve as a stand-alone entity.
2. The industry is engaged in consolidation or other strong deal activity. While it is notoriously difficult to perfectly time an exit window, a good banker can help you navigate and assess whether now is a good time. 
3. Your investors and employees are ready for liquidity sooner than later. Chances are, if your Series A was 8 years ago, those investors are probably ready to exit the cap table. Similarly if your key engineers have gone 6 years at below market compensation (but sitting on stock options with value), they are going to start looking for some liquidity. Many employees of startups also look forward to being acquired by a large, successful and well-funded buyer. Many will stay with the buyer long term, while others will take advantage of the lull in action to start planning for the next venture.
4. If equity is expensive. If the cost of the capital you need to grow will severely dilute the cap table or lose control, you have to rethink whether it makes sense to grow at any cost. You may deliver a better return to everyone on the cap table by selling now, instead of banking on another 3-5 years of growth to reach a much higher exit valuation.
5. Your leverage with customers and partners is very strong now. Because no competitors can do exactly what you do and your customers and partners highly value your platform and expertise, your solution would be very difficult to replace. You may also have a very strong IP portfolio including patents. It helps if you have a long runway of contracted business and a strong verifiable sales pipeline, with revenue to show for it. Additionally, perhaps the company has been receiving credible inbound inquiries about buying the company. While startups may get inquiries all the time from strategic buyers and private equity kicking the tires, if you start getting multiple inbound serious acquisition inquiries, it may be time to pay attention. 

What if I still don’t know? It’s not uncommon to work on raising that Series C while discreetly exploring M&A. It is completely reasonable to understand the strategic options available - ranging from growing organically, to raising a $40M Series C, to exploring M&A. Yes, it’s easier to just pick a path and focus on it - raise capital or exit. But often the options that present themselves to the company as a result of a process can often be surprising and rewarding, and require some work to get there.

If you and your board are considering your next steps, please feel free to reach out.

Brent Lorenz is a deep tech investment banker. He is Founder and Managing Director of Connected Vision Advisors, where he focuses on sell-side M&A and midsized strategic capital raises for clients in markets including AI, Computer Vision, IoT and Semiconductor Ecosystems. Brent is an electrical engineer with over 25 years of hands-on tech and business experience split between the chip and software industry and deep tech investment banking.